The European Commission on March 25 issued guidelines addressed to its member states outlining an EU-wide approach for foreign direct investment screening. The guidelines seek to protect EU companies as well as critical assets that are essential for the EU’s security and public order, particularly in the areas of health, medical research, and biotechnology.

The issuance of these guidelines has been mainly driven by the current coronavirus (COVID-19) crisis and the European Union’s awareness that there is an increased risk for EU companies and assets operating in critical areas to be acquired by foreign investors, in particular through “predatory buying.” Consequently, this would result in the EU’s or in a single member state’s increased exposure and vulnerability in relation to its security and public order.

THE EU COMMISSIONGUIDELINES
The guidelines address two main types of measures which member states can adopt to mitigate the increased risk exposure as a result of the COVID-19 crisis:

The EU Commission refers to foreign direct investment (FDI) screening regimes that are currently implemented in 14 member states1 and the Foreign Direct Screening Regulation which was adopted in March 2019. The EU Commission reminds the 14 member states to make use of their FDI screening mechanisms, in particular, taking into account the risks to critical health infrastructures and supply of critical inputs, but also to other critical sectors as envisaged in the EU legal framework. As for those member states that currently do not have a screening mechanism, the EU Commission urges them to set up full-fledged screening mechanisms and in the meantime to use all other available options to address cases where the security or public order could be at risk because of the acquisition of a particular business, infrastructure, or technology by a foreign investor.
The EU Commission addresses other types of measures that can be taken by the member states to restrict the free movement of capital. This covers cases that are outside the scope of the FDI screening rules (in particular, portfolio investments) but which could potentially still threaten the security or public order of one or more member states, or the EU as a whole.EFFECTIVEUSE OF FDISCREENINGMECHANISMSDURING COVID-19 CRISIS
The EU Commission emphasizes that the FDI Screening Regulation applies to all sectors of the economy and is not subject to any thresholds. It allows member states to prohibit foreign investment under their national screening mechanisms if such investment would result in a threat to their security or public order. This also covers a health emergency.

The EU Commission highlights that, during the COVID-19 emergency, FDI screening mechanisms should apply with particular attention to businesses operating in critical health infrastructures in order to avoid that the COVID-19 crisis results in a “sell-off of Europe’s business and industrial actors, including small and medium-sized enterprises.”

However, the EU Commission makes clear that a foreign acquisition will not necessarily have to be prohibited but that mitigating measures, which, for instance, guarantee the supply of medical products or devices, may be sufficient to safeguard the public order of a member state. Indeed, the principle of proportionality as well as the other general principles of EU law apply to any FDI screening by national governments in the EU.

The EU Commission urges the 14 member states to make full use of their existing screening mechanisms, and those that do not have them to set up full-fledged screening mechanisms as soon as possible. Reminding member states of the interdependencies within the European market, the EU Commission also attaches great importance to the cooperation mechanism between member states with regard to FDI screening established under the FDI Screening Regulation.

While foreign investment screening remains a prerogative of each member state, under that mechanism, member states need to inform and take account of other member states’ interests when adopting a measure under their FDI screening mechanism. Conversely, in case a foreign investment does not undergo an existing national screening process in a given member state, the FDI Screening Regulation stipulates that member states may provide comments, and the EU Commission may provide opinions within 15 months after the foreign investment has been completed. This could lead to the adoption of measures by the member state where the investment has taken place, or alternatively, necessary mitigation measures referred to by the EU Commission.

From a German law perspective, the general FDI screening which is applicable to all sectors of the economy without any minimum requirement as regards to the value of the transaction provided that the national security or public order is at risk, may be initiated by the German Ministry of Economics within five years after the transaction has been completed in case no national screening mechanism has been undergone and the German Ministry of Economics had not been notified of the transaction. In such a case, comments of the member states and opinions of the EU Commission have to be considered by the German ministry in the investment screening process. It remains to be seen how member state comments and EU Commission opinions will be considered in cases taking place in member states without an FDI screening regime.

POSSIBLERESTRICTIONS TO FREEMOVEMENT OF CAPITALDURING COVID-19 CRISIS
Investments not subject to the FDI Screening Regulation, such as portfolio investments, are subject to the rules on the free movement of capital under Article 63 of the EU Treaty. While the free movement of capital is a fundamental freedom guaranteed to EU citizens and to citizens of non-EU countries, member states can impose restrictions on such freedom for the protection of a legitimate public interest. A “legitimate public interest” can notably consist of public health interests (e.g., access to critical supplies or infrastructures vital for medical crisis management), public security interests (e.g., guaranteeing essential public services), or public policy ones (e.g., maintaining financial stability).

The European Commission further highlights that another possible ground justifying restrictions to the freedom of movement of capital is the protection of the EU’s economic and monetary union or an individual member state’s balance of payments.

These exceptions tend to be construed narrowly by the European Court of Justice. In practice, it can only justify a restriction to the movement of capital if the investment poses a “genuine threat to a fundamental interest of society” and if the restrictions are strictly necessary and proportionate (i.e., they are the least restrictive measures possible) to reach that objective.

In other words, as with measures under FDI screening mechanisms, measures based on those justifications would always have to be necessary and proportionate. Notwithstanding, in the guidelines, the EU Commission stresses the fact that permissible grounds of justifications and proportionality have been interpreted more broadly with regard to third country investments, as opposed to intra-community investments.[2]

WHATARETHEIMPLICATIONSFORDEAL PARTIES?
In light of the COVID-19 crisis and the EU Commission’s guidelines, companies and counsel need to accommodate that national authorities will take a very close look at any transaction related to the health, medical research, or biotechnology sectors but also in any other area concerning critical infrastructures.

This increased vigilance will most likely lead to longer proceedings as the relevant national authorities will closely scrutinize any such deal. Companies should therefore plan accordingly with respect to timing and possibly consider risk mitigation strategies such as domestic manufacturing, sourcing, or licensing commitments, early in the process.

As with other types of regulatory filings, it is advisable to engage early with the relevant authorities and to identify solutions that can address any real or perceived security and public order concerns. Finally, investments, in particular from third countries, should ideally be structured in a way that brings them under the increased level of protection by general principles of EU law under the FDI Screening Regulation, as opposed to under the rules on the free movement of capital.

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